July housing sales numbers—down 27% from the month before--sent shudders through government, businesses and the investor world. It was more evidence of a slowing recovery. Buyers pulled back without the expired federal tax credit incentive. Fears increased that housing values and sales may sag further, possibly setting off the dreaded double dip. Meanwhile, mortgage rates stand at all time lows and home prices have already dropped 30-40% in many places. So what does this all really mean?

Government leaders (Obama, Geitner, Bernanke) will continue to cheerlead and try jawboning confidence. Politicians may criticize each other and throw around blame—“the country is going in the wrong direction under so and so (Obama, Geitner, Bernanke")—but nobody gets elected saying America is starting to fall behind and may not bounce back for a long time. Economists for big financial institutions don’t keep their jobs by turning excessively negative about U.S. prospects either—that’s bad for business. So explanations for the extended housing malaise range from high unemployment levels—people fear they may lose their job so put off buying when they otherwise can; and lenders have been too stringent, cutting off people who could otherwise buy; to people fear that values will go down even more so they are holding off when they otherwise would be back in the market. The rationalizations go on--once the employment picture improves and lenders loosen up, we’ll be back, fears will dissipate, and everything will be okay.

And you know if employment improves and wages track up that will certainly help, and if lenders loosened up that would too.  But employment prospects look reasonably bleak—the economy isn’t creating enough jobs and loose credit standards helped get us into this mess. Wages for most Americans have been stagnant to down for more than a decade. Maybe lenders have over-corrected somewhat, but do we really want Fannie and Freddie to throw more good taxpayer money after bad?

This talk only camouflages the ugly reality that leaders and investors don’t want to face and don’t want us to confront. The reality is many Americans are effectively under water and just can’t afford to buy homes without significant subsidies that the government really can’t afford to provide anymore. Everyone or nearly everyone agrees that letting people buy homes with no or very low down payments on interest only mortgages was unsustainable. Higher credit standards and more stringent underwriting knocks the no- to low-down payment crowd entirely out of the home buying game. But then there are a lot people who just can’t afford to put 20% or 30% down even though prices have plummeted. That’s certainly the case on all those condos developers hoped to sell for million dollar plus price tags. Ten percent of current home holders are at least in technical default on mortgages, and others scrimp to keep up. Many people sink under credit card debt and car loans even when they are gainfully employed. And we should cut them more slack to buy a house?

Now that’s where new jobs come in. Sure, if all these people got big wage hikes and the economy was creating all these fabulous new high paying jobs that would help cut into personal debt and provide greater security for skittish lenders. But the jobs are just not there… and haven’t been. And it’s not just that people can’t afford homes. The Census Bureau reported last week that the birth rate is down, because couples put off having babies in this economic funk.

Simply, not enough people have the money to have a kid, let alone float homes sales even with low interest rates and prices at 2004 levels or below. They’re busted—we’re busted.